How should parents divide their assets between their children and stepchildren?

My wife’s father and stepmother both have kids from their previous marriages. All the children were grown when the parents married and are now in sight of retirement themselves. Both parents have problematic health (not surprising at their ages). It is not clear which one will go first. My wife and I have discussed what happens financially if her father dies first. I suspect if her father goes first, her stepmother’s children will get everything, and the reverse will happen if she goes first.

I fully understand why, since neither of them raised the other’s children. Let me make it clear that we’re not expecting any big inheritance (I don’t think it will be all that much).

I’m a few years from retirement. We’ve got over $1 million saved, and we try to make sound financial decisions (we have zero debt). I even took the first of the six-course CFP program a number of years back, just so I’d have a better handle on financial matters. On the other side of the family tree, one of the step-siblings is better off than we are financially. I don’t think any of us will starve, although I can’t rule out hard feelings about it (I hope I don’t have them; I don’t think I will).

So my question is this: With the increasing number of blended families and midlife divorces/remarriages, how should the parents handle this to be sure that their wishes are fulfilled?

I know that if my father in law goes first, I wouldn’t want his wife to be restricted from spending all the remaining estate, if needed, to live her life. And if she goes first, then he should be able to spend it however he wants. I wouldn’t want the surviving spouse to live a lesser life just to set aside joint assets for the deceased spouse’s children.

So how would parents and step-parents set this up so that the surviving spouse isn’t restricted in using the assets, but when they’re both gone the children/stepchildren get what their respective parents wanted them to have? Is that even possible? Or does it just depend on the goodwill of the surviving spouse? The same question applies in the case where one parent dies and the remaining one remarries. This happened to one of my grandparents some decades ago and it did create some conflict.

Whatever your recommendation, I’m not going to bring it up to my in-laws unless they ask (and they probably won’t). They’ll do whatever they’re going to do and maybe they’ve made some arrangement for this. I’m asking mainly because I’m curious about how often you see this, and whether there is a way to protect the wishes of the deceased spouse without restricting the life choices of the surviving spouse. If, as I suspect, this is increasingly common, then you probably have a lot of readers who could make use of the answer. If there is one…

Jack

Dear Jack,

All this talk of people going first is making me queasy — maybe because it’s got me thinking about my own mortality.

I appreciate both your Shakespearean approach to this inheritance. It’s not about who needs it, it’s more about what people believe they deserve. As wealthy as you are or your step-siblings are, you are wise to realize that it’s not always about having plenty of money, or even enough money. It’s about that childhood wail when a young child looks around the kitchen table at the globs of ice-cream in your brothers’ and sisters’ bowls: “They got more than me!”

One parent will be left standing, so will his/her own children fare better than the stepchildren? Sure, that happens all the time. I have received many letters from disgruntled children who have been left drawn the short straw. This was the most read Moneyologist letter of 2016. This stepmother wanted to cut her stepchildren out of a $300,000 life insurance policy outlined in a divorce decree he had with his first wife. In that case, the divorce decree trumps any name changes on a life insurance policy.

In your case, your wife’s father and stepmother could — make that should — write a will to avoid any ill-will and in-fighting after one or both are gone. They can set up a living trust for their children should one predecease the other. (Or “goes first,” as you say.) In most jurisdictions, a couple can enter into a contract not to change their respective wills, should they wish to leave their own children more or ensure that each child and stepchild receives an equal amount. Without a will, the state’s laws take precedence and typically stepchildren get nothing.

The will could say a child’s shares could only be used for education, down payment on a home or a grandchild’s education, for instance. The will only controls probate assets, so the family home or a 401(k) and other accounts with beneficiaries would go directly to the heirs with no strings attached. At the death of the first spouse his or her living trust would become irrevocable and drafted such that the funds could be used to support the surviving spouse or to be held exclusively for the children and/or step-children.

There is one other option as Joe Fryoux suggests on the Moneyologist Facebook Group: “Tell them to spend it all and enjoy life. Then there’s nothing left for step siblings to argue over.”

Do you have questions about inheritance, tipping, weddings, family feuds, friends or any tricky issues relating to manners and money? Send them to MarketWatch’s Moneyologist and please include the state where you live (no full names will be used).

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Hello there, MarketWatchers. Check out the Moneyologist private Facebook group, where we look for answers to life’s thorniest money issues. Readers write in to me with all sorts of dilemmas: inheritance, wills, divorce, tipping, gifting. I often talk to lawyers, accountants, financial advisers and other experts, in addition to offering my own thoughts. I receive more letters than I could ever answer, so I’ll be bringing all of that guidance — including some you might not see in these columns — to this group. Post your questions, tell me what you want to know more about, or weigh in on the latest Moneyologist columns.

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